Survivors Can Bank Benefits, Skip Insurance Accounts

July 29 (Bloomberg) -- Life insurance beneficiaries seeking
federal protection for their money should take their proceeds
straight to the bank rather than risk losing their cash by
letting insurers hold onto it.

Policyholders may assume when buying life insurance that
beneficiaries will get the payouts in a single bank check. That
may not be the case, Bloomberg Markets magazine reports in its
September issue. Insurance companies such as Prudential
Financial Inc. profit by holding onto the money in their own
accounts and issuing checkbooks, essentially IOUs, for survivors
to access their money.

“The language they use at the time is all couched in
reassuring phrases -- let me give you the security of not having
to make an investment choice,” said Lawrence Baxter, professor
of the practice of law at Duke University School of Law in
Durham, North Carolina. “It leverages off of that state of
emotional distress.”

After a loved one passes away, survivors must file a claim
and provide a death certificate, according to Bob Hunter,
director of insurance for the Consumer Federation of America in
Washington. The insurer will then contact the beneficiaries with
options for payment, which usually include keeping the money in
an account with the insurance company, Baxter said.

“It’s very easy for trusted companies to mislead naïve
customers, and life insurance companies are trusted,” said
Daniel Kahneman, a professor of psychology and public affairs at
the Woodrow Wilson School of Public and International Affairs at
Princeton University and a Nobel Prize winner. “The fact that
they seem to be outside the regulatory reach is shocking.”

No FDIC Protection

Insurance companies may be violating a federal bank law,
Bloomberg Markets reported. A 1933 statute makes it a felony for
any company to accept deposits without state or federal
authorization. The insurer accounts aren’t guaranteed by the
Federal Deposit Insurance Corp.

Beneficiaries can withdraw some or all of the money
immediately from the account by writing a check to themselves
and depositing or cashing it at their local bank, Bob
DeFillippo, a spokesman for Newark, New Jersey-based Prudential
said in an e-mail. There are no fees associated with receiving a
lump-sum check, which is typically sent within three days
following approval of a claim, he said.

There are 1 million death-benefit accounts totaling $28
billion managed by insurers that aren’t actually sitting in a
bank backed by the FDIC, Bloomberg Markets reported. The FDIC
insures accounts up to $250,000 for each depositor and
potentially more depending on how accounts are opened.

Low Rates

About 40 percent of these so-called retained-asset accounts
at the insurance companies still have money in them a year
later, which means they’re receiving interest rates as low as
0.5 percent without FDIC protection, according to Bloomberg
Markets. Prudential’s general account earned 4.4 percent in
2009, mostly from bond investments, based on U.S. Securities and
Exchange Commission filings. Since the checks may resemble
actual bank checks, beneficiaries often assume the money is
actually in bank-insured accounts when it isn’t.

“Leaving it with the insurance company is not going to
give you more money -- don’t let them hold onto it,” said
Hunter of the Consumer Federation of America.

Capital One Financial Corp. has a high-yield money-market
account yielding 1.10 percent, according to the McLean,
Virginia-based bank’s website. For those who don’t need the
money immediately, a 3-year money-market certificate offered by
the Pentagon Federal Credit Union for a $1,000 minimum deposit,
is yielding 2.25 percent annually, according to their website.

Insurers Can Fail

Policyholders shouldn’t assume that insurance companies
don’t fail, said Baxter, the law professor. And when they do,
state insurance departments are supposed to back life insurance
policies by raising money from other insurers that do business
in their state. No states even keep track of how much money
insurers are holding in retained assets, Bloomberg Markets
reported.

The checkbooks are “a pretty widely accepted way of paying
death benefits,” said Paul Graham, vice president of insurance
regulation and chief actuary for the American Council of Life
Insurers, a Washington-based trade group. “We actually think
it’s a benefit to the beneficiaries to have these accounts.”

Cuomo Probe

Some states will take the proceeds if an account is idle
for a certain amount of time. In New York, funds that haven’t
been touched for more than three years may be turned over to the
state. Six states had rules regarding retained-asset accounts as
of July 2009, requiring insurers to disclose fees and interest
rates and tell survivors they can withdraw all money by writing
a single check, according to the National Association of
Insurance Commissioners.

The Department of Veterans Affairs and the New York State
Insurance Department said yesterday they will investigate the
practice of life insurance companies directing benefits into
their corporate accounts. New York Attorney General Andrew Cuomo
began a fraud probe today into the life insurance industry and
subpoenaed New York-based MetLife Inc. and Prudential for
information about profits on death benefits retained from
families of deceased policyholders including military personnel.

USAA Policy

USAA Life Insurance Company, a subsidiary of San Antonio-based USAA, has a payout policy that differs from some other
insurers. The company says its benefits are paid in a lump sum
or deposited into the company’s savings bank, which is FDIC
insured, said Eric Smith, president of USAA Life. The firm
provides insurance primarily to the military and their families.

“It isn’t unusual for beneficiaries to be distraught,
depressed and confused, and they don’t know what they want to
do,” so they end up keeping the funds in these accounts, said
Smith.

J. William Worden, a professor of psychology at Rosemead
School of Psychology in La Mirada, California, who specializes
in grief counseling and therapy, said one reason people may keep
money with insurers when they shouldn’t is because “there can
be a sense that, I don’t want this to have happened, so I don’t
want to confront things that remind me this has happened.”